‘Bright Spots’ in UK Retail Stocks in Run-Up to Christmas

Challenging economic conditions may persist in Britain, especially for the retail sector, but two stocks are set defy the gloom and shine in the seasonal shopping period, analysts say.

Clothing and food store Marks & Spencer and Associated British Foods, which owns Primark, have both rallied around 23 percent so far this year — and the rally is set to continue according to Angus Campbell, head of sales at Capital Spreads.

"I think you have to be cautious towards the retail sector but there are some bright spots," he told CNBC Tuesday.

Marks & Spencer reported half-year results on Tuesday showing a fall in profit to 297 million pounds ($474.4 million), but analysts had expected profit of 280 million pounds. The news sent shares higher by 1.37 percent on Tuesday.

The results were much better than people were expecting, according to Campbell, and come at a "bullish time of year" for retail stocks. However, Chief Executive Bolland of M&S, Britain's largest clothing retailer, warned that recent trading had been volatile and there was "continuing pressure" on consumers' disposable incomes.

The newsflow for the U.K. economy hasn't be good recently, apart from a surprise 1.0 percent rise in gross domestic product (GDP) for the third quarter. New data from the British Retail Consortium showed total retail sales rose by a modest 1.1 percent year-on-year in October, down from a rise of 3.4 percent year-on-year in September.

"The next, at least, two years if not longer you are going to see very dull consumer spending," Bob Parker, senior advisor at Credit Suisse told CNBC Tuesday, although he conceded that the process of consumer deleveraging over the last four years is largely over. "It's going to remain a very tough environment and in that environment it's going to be low costs companies like Primark which win out."

The retailer Primark, known for its low cost clothing, is owned by AB Foods which announced a 17 percent rise in full-year profit on Tuesday.

Research firms Panmure, Hargreaves Lansdown, and Davy have all released research notes indicating that investors should either buy or hold the stock.

"It's Primark where the real excitement is in this story and it's a really interesting concept," Barry Dixon, head of research at Davy Research told CNBC Tuesday. "Here's a retail proposition that's growing like-for-like revenues by 2, 4, 5 percent over the last five years. The numbers this morning showing like-for-likes growing at 3 percent."

The firm has 249 stores, mainly in the U.K., Ireland and Spain, but Dixon is particularly attracted to the strong growth opportunities for the stock.

"The model seems to be transferring very well to Iberia and to Germany," he said. "We are hearing that there are organized culture tours in Germany to specifically to go to Primark stores for a day shopping."